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Valuation of "the market" vs valuation of a stock - Printable Version

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Valuation of "the market" vs valuation of a stock - Kerim - 03-16-2013

A friend sent me this link earlier today: http://www.multpl.com/shiller-pe/. The only note in his email was that he thought I "might like this."

This friend knows I buy stocks, and knows that I am reasonably bullish at the moment. I guess the obvious take-away from this is supposed to be that the market is overvalued at the moment, and might be a good idea to back off.

But my reaction is two-fold: First, I haven't really dug into the merits of the "Shiller PE" as a valuation tool. I'll save that for another day. Second, and more importantly, who cares? I happen to think that there is a vast gulf between the idea of valuing the market as a whole and valuing individual stocks. I think that various means of valuing the market as a whole can be useful as a very rough tool, a blunt instrument, that can give you a sense of whether it is a good time to be buying or selling. But when your focus is on buying individual stocks, you have a ton of much more relevant data at your disposal, which allows you to make a much more precise determination about whether the stock is over- or under-valued. It is to a large extent meaningless to observe (rightly or wrongly) that the whole market is overvalued -- you can still find individual stocks that are good buys. Finding those good buys may be more difficult when the market at large is up a lot (as seems to be the case today, relative to even 6 months ago). But they are still out there, and this chart does not deter me from looking.

(Only caveat to all of this, for me, is that I've got a pile of money in my 401(k) which I cannot use to buy individual stocks. When I've thought the market as a whole to be really undervalued, I have moved chunks of money into indexes.)